Employee Payroll Tax Deferral - Presidential Memorandum
We have been reviewing the guidance issued by the IRS on August 28, 2020 related to the presidential memorandum directing the Secretary of the Treasury “to defer the withholding, deposit, and payment” of the employee share of social security taxes on certain wages paid between September 1 and December 31, 2020. While the current guidance still leaves many items unresolved, we are reviewing information from the American Payroll Association (APA), as well as the American Institute of CPAs (AICPA), to help guide us. We are also in discussions with software engineers to determine how to effectively implement the deferral and eventual tax collection for those employers and employees who choose to opt-in. While it is already past September 1, please understand the Treasury guidance released August 28 has yet to provide sufficient details to payroll software engineers in order for them to fully implement the program. Work is underway regardless, and we plan to implement the software changes required to accommodate the tax deferral option as soon as available. Meanwhile, paychecks will continue to be calculated with Social Security/OASDI withheld. Even after the software changes are released, we will not implement the payroll tax deferral program unless specifically directed by employers.
We hope you understand this is a very unique payroll tax directive that puts employers in a difficult situation. We suggest you consult with your tax and legal resources in making decisions related to the deferral for your organization. We will do our best to support all employers no matter the path taken in terms of the deferral. For the time being, please review the following to understand the dynamics involved, particularly surrounding the employer liability concerns inherent in the deferral, information related to opt-in/out implementation process, and general information to help you discuss the program with your employees.
- The presidential memorandum only grants the authority to defer the employee portion of Social Security/OASDI taxes; it does not forgive or eliminate the tax liability.
- Nothing in the presidential memorandum or the Treasury guidance requires nor prohibits an employer from participating in the deferral of employee Social Security/OASDI. However, Secretary Mnuchin has made public comments to suggest it is optional for employers.
- Only the employee portion of Social Security/OASDI tax equal to 6.2% of taxable wages is applicable to the presidential memorandum. Federal income taxes, Medicare taxes, State/Local taxes and the employer’s portion of Social Security/OASDI taxes are not applicable to the deferral.
- Deferral eligibility will be determined each pay period based on Social Security taxable wages under $4,000 for a bi-weekly pay period or an equivalent amount with respect to other pay periods.
- For those participating, employers would be required to withhold the total deferred taxes from their employee’s wages starting January 1 thru April 30, 2021. It is suggested that the amounts would be repaid evenly across that time period, but it is unknown exactly how that would function for hourly or other workers with variable incomes per pay period.
- Please keep in mind, under current tax law, employers are responsible for collecting employee taxes, including social security, and remitting them to the IRS. While the current memorandum allows for deferment of the employee portion of social security until 2021, it does not release employers from the liability should they be unable to collect the deferred taxes from employees in the future.
- For any deferred taxes not paid to the IRS by April 30, 2021, the IRS will accrue interest, penalties and additions to tax beginning on May 1, 2021, and employers may be liable for these additional amounts.
- Should an employee’s employment terminate prior to collection of deferred taxes, the guidance suggests employers may “make arrangements” to collect the under-withheld taxes. However, no details were provided in the Treasury guidance as to how these “arrangements” may function.
- Current IRS guidance states reimbursement for under-withheld taxes is a matter of settlement between the employer and the employee, but any arrangements to collect on under-withheld taxes must be repaid during the same calendar year taxes should have been withheld. Based on the deferral, this may suggest any arrangements must be paid by end of 2021 instead of 2020, but this is still unclear. ASAP is seeking legal advice regarding employer’s options should they be unable to collect any deferred taxes from employees.
- While much discussion has focused on employee opt-ins, the Treasury notice does not specifically detail any requirements for employers to follow. Industry consensus suggests that employers wishing to participate provide some sort of notice, electronic or written, for employees to sign attesting to their wishes to participate or opt-in. ASAP is seeking legal advice regarding sample language for such notice and will share once available.
We intend to support all employers' wishes in regards to the program. However, any failure to deposit penalties or interest that should arise from participation in the program will be that of the employer’s alone and not covered by our normal guarantee.
Additional Reading & Sources:
- KPMG report: Initial analysis of Notice 2020-65, guidance on employee payroll tax deferral
- Forbes: Questions Remain After IRS Rolls Out Guidance On Payroll Tax Deferral
- CNBC: IRS guidelines put employers on the hook for Trump’s payroll tax break
- CNBC: Here are 5 key things workers should know about the payroll tax deferral
Disclaimer: This information is provided as a self-help tool and does not constitute legal or financial advice. Laws, regulations and lending products are changing daily and decisions as to whether or how to use this information and/or what actions to take are solely those of the employer. The providers of this information disclaim any and all responsibility and liability for its accuracy, completeness or fitness for your particular business purposes.